How Does Bankruptcy Affect Co-Signers on My Debts in Pennsylvania?

When people are in far more debt than they can handle, they may file for bankruptcy and hopefully get a fresh financial start. If that person had other people cosign for things like loans, those cosigners might be in some financial trouble of their own.

If you file for bankruptcy, cosigners might be on the hook for your unpaid debts. It all depends on which bankruptcy chapter you choose when you file. Chapter 7 generally does not offer much protection for cosigners, but Chapter 13 may shield cosigners from liability for debts, at least to a certain degree.

Get a free, private assessment of your case when you call Young, Marr, Mallis & Associates at (215) 701-6519 and talk to our Pennsylvania bankruptcy attorneys.

What Happens to Cosigners if You File for Chapter 7 Bankruptcy in Pennsylvania?

A cosigner is another person, often with better credit, who cosigns a loan, an apartment lease, or other debt. If you cannot make payments on your loan or stop paying rent, creditors may go after the cosigner for payment.

If you file for Chapter 7 bankruptcy, your cosigner might be liable for payment, depending on how you file.

No Debt Discharge for Cosigners

Bankruptcy can be a helpful solution for those facing insurmountable debt, but the benefits of bankruptcy do not cover everyone who signs a loan. Cosigners are not offered many protections in a Chapter 7 case, and they might suddenly be responsible for paying your debts.

When debts are discharged, only your liability to pay is removed. Your discharge of debt does not discharge the cosigner’s liability to repay debts in their name if you file Chapter 7.

Immediate Pursuit by Creditors

The automatic stay that takes effect when you file a Chapter 7 bankruptcy petition does not extend to cosigners of loans or other debts. That means that, almost immediately after you file for bankruptcy, creditors can begin pursuing debt collection from the cosigner in the form of asset repossession, wage garnishment, or lawsuits.

What Happens to Cosigners if You File for Chapter 13 Bankruptcy in Pennsylvania?

Chapter 13 affects cosigners differently than Chapter 7 cases, and may offer the most protection for cosigners.

Protection from Co-Debtor Stay

Chapter 13 bankruptcy protects co-debtors and cosigners from immediate creditor targeting after debtors file because of the co-debtor stay that accompanies the automatic stay for debtors.

While this stay is in effect, cosigners do not need to worry about continued debt collection efforts, harassing phone calls, or even wage garnishment during the 3 to 5 years of a Chapter 13 case.

Failed Repayment Plan

Bankruptcy only eliminates a cosigner’s responsibility for a debt if the debtor pays it in full over the course of a Chapter 13 bankruptcy case. If this does not happen, the cosigner remains liable for the balance, and missed payments can be reported to the credit bureau, negatively affecting their credit.

How Does Filing for Bankruptcy Affect Your Mortgage Cosigner?

If you file for bankruptcy to avoid foreclosure and have a cosigner on your mortgage, you need to proceed carefully and intentionally so that your house is no longer at risk.

Chapter 7

If you file Chapter 7 bankruptcy to stop foreclosure, the automatic stay doesn’t extend to your cosigner. The cosigner is still liable for all secured debts, and creditors can pursue the cosigner’s assets, including your home.

Because of this, Chapter 7 bankruptcy does not always prevent foreclosure if a debtor has a cosigner.

Chapter 13

To minimize the impact of a bankruptcy case on your mortgage cosigner, file Chapter 13 bankruptcy. This will give you time to get up to date on mortgage payments without the risk of imminent home foreclosure because of the co-debtor stay.

If you don’t complete your repayment plan, the cosigner also experiences the negative effects of missed payments on their credit report.

How Can You Protect a Cosigner During Bankruptcy in Pennsylvania?

Our Pennsylvania bankruptcy attorneys can help you determine the best way to file for bankruptcy to protect cosigners. Remember, there are multiple bankruptcy chapters, and some offer better protections than others. For example, Chapter 13 bankruptcy comes with certain advantages for cosigners that you should consider.

Chapter 13

After a bankruptcy court issues an order of relief under Chapter 13, creditors may not commence a civil action against a co-debtor or cosigner to collect any part of the debt unless certain circumstances are present.

Creditors may only take action against a cosigner if they become liable for the debt in the normal course of their business or if the case is closed, dismissed, or converted to Chapter 7 or 11 bankruptcy.

Chapter 7

Alternatively, under Chapter 7, there are no protections for cosigners. The automatic stay that normally shields debtors from creditors’ legal action does not extend to cosigners.

Creditors can go after them for payment while your bankruptcy case is pending. If your cosigner is a family member or close friend, you might want to consider the potential legal consequences your bankruptcy case might have on them.

Consider Other Options

If the bankruptcy option you select offers little protection for cosigners, you might want to consider other ways of paying back the debt. For example, suppose a close friend cosigned on your mortgage, but you defaulted and are facing foreclosure.

Bankruptcy may help you here, but you do not want to put your friend at financial risk. If there is a way to liquidate other assets to pay your mortgage and avoid bankruptcy, like debt consolidation, it may be worth considering.

How Can Bankruptcy Affect a Cosigner’s Credit in Pennsylvania?

When you file for bankruptcy, your credit may take a significant hit. A cosigner’s credit will not be impacted by the bankruptcy filing, at least not directly. Whether the co-singer is shielded from liability may determine the overall impact on credit.

Discharge for Bankruptcy Filer Only

After someone files for bankruptcy, the court may discharge their debt, and they will no longer be liable for payment. The same does not go for cosigners. A cosigner may still be liable for payment, and creditors may go after them for payment.

When the Cosigner Doesn’t Pay

If a cosigner cannot or chooses not to pay these debts, their credit may drop. Worse still, they might be unable to afford to repair their debts and have to file for bankruptcy.

What Can Cosigners Do to Protect Themselves During Bankruptcy in Pennsylvania?

If you cosigned for someone and ended up saddled with their debts because they filed for bankruptcy, you should speak to an attorney about possibly taking legal action against the other person. This kind of situation might arise when a debtor misled a friend or family member into cosigning a loan.

File a Lawsuit

If you have reason to believe that the person you cosigned for can pay but refuses to do so, you should talk to a lawyer about suing them. If you end up paying the debt because the debtor refuses to do so, you may sue them for the money you lost.

Perhaps your “friend” never intended to pay the debt. Now, they have whatever they used to loan to purchase, and you are left with the bill. A lawsuit might be especially effective if the other person has the money to pay their debt but refuses to do so, thus leaving you with their financial burden.

Inform the Bankruptcy Court

Even if you do not sue them, you may raise their financial situation with the bankruptcy court if they file for bankruptcy. Bankruptcy is only an option for debtors who lack the financial resources to pay debts another way. Those with adequate financial resources will be quickly turned away.

FAQs About Filing for Bankruptcy with Cosigners

Can Cosigners File for Joint Bankruptcy?

Joint bankruptcy is only an option for married couples, so the only scenario where you could file for bankruptcy with your cosigner is if your cosigner is also your spouse.

What is the Best Bankruptcy Chapter to File if You Have Cosigners?

If you have cosigners you want to protect as much as possible from your bankruptcy case, file a Chapter 13 petition.

Does a Bankruptcy Case Go on a Cosigner’s Credit Report?

Bankruptcies themselves do not go on a cosigner’s credit report. Missed payments during bankruptcy can, however, negatively affect a cosigner’s credit score.

Can a Cosigner Also File for Bankruptcy?

Cosigners can also file for bankruptcy to get a debt discharge or repay debts they are liable for.

Are Cosigners Officially Notified of Bankruptcy Cases?

Cosigners are interested parties to bankruptcy cases, so they are officially notified by the bankruptcy court of a case involving debts they are liable for.

Cosigners are not necessarily directly involved in bankruptcy cases, however. They will not receive a discharge and only erase their liability if the debtor repays the debt in full.

Speak to Our Pennsylvania Bankruptcy Lawyers for Support

Get a free, private assessment of your case when you call Young, Marr, Mallis & Associates at (215) 701-6519 and talk to our Northeast Philadelphia bankruptcy attorneys.